How can fake news affect your finances?

fake news

The stock market operates on the basic premise of supply and demand. If there is enough demand for a stock and a set supply of shares, that stock’s price will increase. If demand decreases, so does the share price. (Supply could change, too, though not as often.)

There are countless factors that dictate demand. If a company beats their earnings estimates, demand for their stock could increase. If that same company’s product causes a terrible fire, demand will decrease. Everything from financial data to breaking news has an impact on demand and how investors feel about a stock.

Though unverified rumors affected stocks for decades, the recent rise in fake news can also impact the value of tradable assets. Fake news not only hurts a company’s reputation, but can sway a sizable amount of shareholders, too. If the fake news item is bad news — which is often the case — it could have some pretty devastating effects.

All news affects the stock market.

Every bit of news about a company gets factored into their stock’s current share price. If they make an exciting product announcement, investors speculate about what this means for sales in the future. This could drive demand further and increase their share price. If the company fails to meet or exceed these speculative sales goals, the price could come back down. Though how investors interpret news will vary, good news is often met with an increase in value — and vice versa.

Fake news has an adverse effect on the market.

In 2013, a hacker hijacked the Associated Press Twitter profile. They posted a fake tweet about an attack on the White House that left President Obama injured. Such an attack never happened, though its effects were devastating.

Investors panicked after the fake news of Obama’s injury spread. The loss of the President would mean the loss of billions of dollars in big business, a financial slowdown, and other repercussions. Investors believing the news story thus sold their stock, causing a 130-point drop of the Dow Jones Industrial Average. The S&P 500 also lost $136 billion in value, meaning most American stocks plunged. Though the market went back up shortly after investors realized the news item was fake, all sales during the “flash crash” were final. This means that many investors lost millions in gains because they believed a fake tweet.

Fake news can also affect cryptocurrencies.

On June 25, 2017, a post on a message board claimed Vitalik Buterin, the creator of ethereum (a popular cryptocurrency), died in a car crash. The loss of ethereum’s creator and one of its chief advocates would mean less development and interest in the cryptocurrency. This is why many investors immediately sold their stakes upon hearing the news.

Buterin is still very much alive. The fake news caused an unjustified panic that caused ethereum to lose $4 billion in market value. This was likely the intended result from the fake news creator: to lessen demand and buy ethereum at low prices. Though ethereum is recovering (albeit slowly), it’s not quite at the level it was before the crash.

How to tell real news from fake — and when to react.

When reading the news, make sure the site or source you’re reading from cites or links to their sources. Sites that don’t are unscrupulous at best and downright fake at worst. If you don’t have another way to verify the news item or can’t find the news elsewhere, chance are it might be bogus.

If you’re investing for the long term (read: retirement), you don’t want to react to every bit of news. If a company’s sales decrease now, they could recover later. If a company’s competitor announces a superior product, that doesn’t mean your company of choice will lag in sales. If your stock is at risk of going bankrupt or losing billions in value, then you might want to take action. Remember: not every bit of bad news is a world-ender.